How do you avoid higher rate tax on savings interest

ColdIron

km1500 said:

you're not gifting any money to your parents you have no intention of gifting any money to your parents. What you are asking your parents to do is to invest your money to earn your interest and then declare on their tax return that it is their money and their interest and that they would like their relevance allowances set against it

It's interesting isn't it. Gifting money to a low or non earning spouse expressly to pay less tax by taking advantage of their personal allowance is a very common and quite legal form of avoidance. Although it's common money they could even gift the money back at a later date

Discuss

I guess the difference is that it is common money. Sadly I don't have a spouse and have never been able to take advantage is this very useful 'wheeze'

EthicsGradient

ColdIron said:

saverspavers61 said:

ColdIron said:

Have you considered the effect of a one off pension contribution from your earnings as a higher rate taxpayer? You don't say anything about how far you are into HRT, how much of that might be excess income or you pension situation (or whether you pay Scottish tax rates) but here's a thought

If you increased the percentage of your salary that you contribute to your pension to make it, say, £10,000 extra that would be £12,500 gross with basic rate tax relief. HMRC would increase the higher rate threshold by that £12,500 from £50,270 to £62,770 so that's £12,500 you would only pay 20% tax on rather than 40%

Would that soften the blow of the basic/higher rate tax differential on the interest of the £250,000?

All quite legal and avoids a lot of effort plus all of the pitfalls that may be involved with gifting. You'd have £12,500 extra in your pension as well

however I’m not getting the benefit until retirement.

That's not entirely true. If you got 5% interest on £250,000 that'd be £12,500 assuming 12 months

If that were taxed at 40% you'd pay £5,000 and have £7,500 extra to put towards a new house

With the pension contribution you'd only pay £2,500 tax and have £10,000 extra for the new house, a £2,500 improvement now, not in the future

Add that to the extra £2,500 basic rate tax relief in the pension (that you would have to wait for) and you'd be £5,000 better off which is exactly the same amount as the tax that you are wanting to avoid

saverspavers61 said:

As a higher rate tax payer, I’m paying over 40% on the interest which I would like to avoid.

For 18 months just increase the numbers

Simple, clean and definitely not tax evasion. No advisor fees either

But they'd have £10,000 less to use for the new house - it had to be paid into the pension. Yes, upping the pension contributions gains money in the long run, but it stops the money being available when it's needed, in the next few years.

BoGoF

EthicsGradient said:

But they'd have £10,000 less to use for the new house - it had to be paid into the pension. Yes, upping the pension contributions gains money in the long run, but it stops the money being available when it's needed, in the next few years.

That's assuming the OP's idea of ploughing £250,000 into a new property works out better than investing it in a pension. There's plenty advice on the pensions board that will tell you that paying off your mortgage in preference to paying into a pension will cost you in the long run. So the question is does the OP really need all that money available. I think there's an argument for using at least some of that money to take them below the 40% threshold by paying into a pension - which would be the advice to anyone who could afford it.

jimjames

boingy said:

 In tax terms that's a gift. Pure and simple. What happens to the money after that is entirely up to the parents. They could keep it, spend it, or make a gift of some or all of it to someone in the future.

But if care becomes an issue then the parents giving away £250k will certainly raise red flags and might invalidate the transfer. Not sure how far back that might be looked at as to whether it could be an issue.

penners324

Is the housing market going to slow down? Timing this seems futile and counter productive. 

EthicsGradient

BoGoF said:

EthicsGradient said:

But they'd have £10,000 less to use for the new house - it had to be paid into the pension. Yes, upping the pension contributions gains money in the long run, but it stops the money being available when it's needed, in the next few years.

That's assuming the OP's idea of ploughing £250,000 into a new property works out better than investing it in a pension. There's plenty advice on the pensions board that will tell you that paying off your mortgage in preference to paying into a pension will cost you in the long run. So the question is does the OP really need all that money available. I think there's an argument for using at least some of that money to take them below the 40% threshold by paying into a pension - which would be the advice to anyone who could afford it.

This gets into a different discussion - whether all the 250k is needed for the house purchase, even if they also get the maximum mortgage they can, whether they get a better rate by using all the 250k and so not borrowing the maximum possible percentage of value, and so on. Their life may well be improved by having a better house for the next 20 years rather than more money in retirement. They haven't asked us "should I borrow a bit more for the house, and then use the difference for something else?"

BoGoF

EthicsGradient said:

BoGoF said:

EthicsGradient said:

But they'd have £10,000 less to use for the new house - it had to be paid into the pension. Yes, upping the pension contributions gains money in the long run, but it stops the money being available when it's needed, in the next few years.

That's assuming the OP's idea of ploughing £250,000 into a new property works out better than investing it in a pension. There's plenty advice on the pensions board that will tell you that paying off your mortgage in preference to paying into a pension will cost you in the long run. So the question is does the OP really need all that money available. I think there's an argument for using at least some of that money to take them below the 40% threshold by paying into a pension - which would be the advice to anyone who could afford it.

This gets into a different discussion - whether all the 250k is needed for the house purchase, even if they also get the maximum mortgage they can, whether they get a better rate by using all the 250k and so not borrowing the maximum possible percentage of value, and so on. Their life may well be improved by having a better house for the next 20 years rather than more money in retirement. They haven't asked us "should I borrow a bit more for the house, and then use the difference for something else?"

Indeed not, but the whole discussion started on the basis of paying 40% tax on the savings - there are ways to mitigate this and as I see it there doesn't seem to much support for the OP's proposal. It will go the way of a lot of threads.......seek advice, ignore and do what they were going to do anyway.

Expotter

Apologies if this is a stupid idea, but what if the OP were to lend his parents the money, at a 0% rate of interest. At a specified date, they pay the money back and keep the interest earned. If the parents later decided to gift him an amount, say equivalent to the interest earned, would it be viewed in the same way?

km1500

good idea the first part ie a real loan, above board, 0%

only problem is that the parents don't need or want a loan - it is an artificial tax avoidance structure gone into with the explicit aim of using the parent's tax free amount. The OP knows it and the parents know it.

Not to say you wouldn't get away with it though, but the OP would be asking parents to.do something not allowed.

xylophone

 As far as I can see, there is no problem with the OP lending her parent the money at nil interest and repayable on demand.


She can ( and i'd say should) set up a signed and witnessed document as a formal record of the loan.
 

The parent can use the money as she chooses.


If the parent chose to deposit the cash in interest bearing current accounts, that interest would  belong to the parent.


Let's suppose the parent is not required to repay the loan for six months or so  and earns  around £5000 in interest during that time.

As it would appear that this lady is in receipt of only a modest amount of non-savings income, it is possible that she would not be liable to tax on this interest.

She might choose to keep the interest for herself  or  to make a gift to her spouse. She and the spouse might choose to use their IHT  gift allowances in favour of their daughter.


Again as far as I can see, all this would be  perfectly legal.

HMRC would know about the interest earned by the parent through the standard reporting system.

Only if she received interest over £10,000 per annum would she be required to advise HMRC personally.

There is no legal requirement for the parent to report any gifts made to HMRC.